US hiring surge challenges rate cut expectations; Dollar rallies

Strong job additions in December lead to a scaled-back forecast for early Fed rate cuts, bolstering the dollar's best week since July

By Ahmed Azzam | @3zzamous | 5 January 2024

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  • Friday US jobs report in focus as labor market shows strength

  • Traders trim bets to 65% chance of Fed cut by March meeting

  • Dollar index holds steady, poised for its strongest week since July

US job market shows strength

The US private sector demonstrated robust hiring in December, adding 164,000 workers, significantly above the revised 101,000 in November and surpassing market expectations of 115,000. The leisure and hospitality sector led the job gains, though manufacturing witnessed job losses. Concurrently, there was a noticeable slowdown in pay growth.

Following the positive employment data, the dollar index remained around 102.5 on Friday. It is now on track for its best week since July, as traders revise their expectations for Federal Reserve interest rate cuts this year. The initial anticipation of early and significant rate cuts has been tempered by recent labor market strength.

Anticipation for upcoming jobs report

Investors are now keenly awaiting the comprehensive monthly jobs report. It is projected to show the US economy added 170,000 jobs in December, a decrease from November's 199,000. The market's expectation of a Fed rate cut in March has diminished to around 65%, down from the nearly 90% probability seen a week earlier.

The market sentiment has shifted to a more cautious 'wait-and-see' approach regarding US labor market trends and their implications for Fed policy. Traders are also closely monitoring upcoming euro-zone inflation and producer prices data, which will be crucial in shaping expectations for the European Central Bank's monetary policy decisions.

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